“On October 31, 2011, MF Global, a large brokerage firm registered with the Securities and Exchange Commission (SEC) as a broker-dealer and with the Commodity Futures Trading

Commission (CFTC) as a futures commission merchant (FCM), filed for bankruptcy, marking the eighth-largest bankruptcy in U.S. history. Based on the subsequent investigation by the bankruptcy trustee, it appears that the firm failed as a result of a “run on the bank” by customers seeking withdrawals, combined with increased margin calls on the firm’s proprietary trading positions related to distressed European debt, which the firm could not meet. Normally, brokerage customers are protected from brokerage failure. On the securities side, investors may receive up to $500,000 from the Securities Investor Protection Corporation (SIPC) if the failed brokerage’s assets are insufficient to meet customer claims. In futures markets, there is no insurance scheme comparable to SIPC, but customers are supposed to be protected by strict segregation rules: customer funds entrusted to FCMs are required to be kept in separate accounts and the FCM is not allowed to use them for its own purposes. In the MF Global case, however, about $1.6 billion in customer funds were found to be missing after the bankruptcy. This consisted of about a $900 million shortfall for domestic U.S. accounts at MF Global trading securities and commodities and a $700 million shortfall related to trading by customers on foreign exchanges. The CFTC, SEC, Justice Department, and the bankruptcy trustee investigated to locate the missing funds and determine causes of the loss. During the investigation, the bankruptcy trustee found that customer funds had been wired to various banks and trading partners of MF Global to meet overdrafts and collateral calls. As of June 2013, the trustee announced that 89% of U.S. futures customers’ funds had been located and returned. The trustee anticipated that figure would reach 94% once certain legal agreements were acted upon. However, for futures customers overseas, or who had had accounts set up in which to trade on foreign exchanges, the figure was significantly lower, with only 18% of their missing funds returned as of June 4, 2013, albeit with an ultimate expected return rate of 84%-91%, according to the trustee.”

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